From Panama to Hong Kong — and why you can't afford to live in Vancouver

When the dust settles on the Panama Papers saga, the Canadian angle may not be how much federal and provincial treasuries have been bilked by our own One Percenters, but what an inviting and unquestioning haven this country is for foreigners wishing to hide their wealth.

Two key Canadian government agencies have already warned that this country’s lack of rules, regulations or even basic data-gathering leaves it open to money-laundering and questionable investments. These warnings have come after a belated examination of the vast amounts of money being thrown into the Toronto and Vancouver property markets, primarily — but not exclusively — by wealthy Chinese, many of them closely connected by blood or loyalty to the Communist Party regime in Beijing.

There have been rumours for some time in the wake of studies by the Financial Transactions and Reports Analysis Centre and the Canada Mortgage and Housing Corporation (CMHC) that a major problem in gathering useful information is that very many purchases are made in the name of numbered companies registered in tax havens.

This makes it nearly impossible to identify the beneficial owners of property or businesses purchased in Canada by non-resident foreigners. Canada — unlike other countries such as the United States — does not keep records of buyers’ countries of permanent residence or the beneficial owners of property or businesses.

The 11.5 million leaked confidential documents from the Panamanian law firm Mossack Fonseca, the world’s fourth largest provider of anonymity for tax haven investors, confirms the route many wealthy Chinese are taking to get money out of their country. The papers also show the enormous challenge facing countries like Canada and many others if they want to get serious about ending the evils of tax avoidance and the increasingly socially divisive hidden fortunes of the mega-rich.

That said, the gross inflation of Toronto and Vancouver property prices cannot be blamed entirely on foreign money. Many Canadians have jumped on the bandwagon and have flipped their way up the ladder of desirable homes. The foolish have splurged on the credit lines made available to them on the supposed value of their homes. Short-sighted municipalities are basing their property tax assessments on the transitory valuations of houses — and driving fixed-income people out of town.

The venal, of course, have found many ways to rip off the Chinese — who are so intent on getting their money into a country where people enjoy the protection of the rule of law, they don’t care what they have to pay. Even Canada’s colleges, universities and schools have joined the feeding frenzy, luring foreign students and hitting them with the highest fees the market will bear. The CMHC says there is evidence many of the properties being sold at outlandish prices in Vancouver are being purchased by the families of foreign students — a temporary residence in Canada that allows them to get a foot in the door. The kid’s degree is just icing on the cake of the multi-million dollar mansion, the purchase of which was simplified by the student’s temporary residence in Canada.

China — especially Hong Kong — stands out as the most active arena where Mossack Fonseca caters to the desire felt by the rich and (sometimes) the famous for anonymous security for their assets.

The 2.6 terabytes of data from the Mossack Fonseca files was leaked to the German newspaper Suddeutsche Zeitung over a year ago and has been examined and analysed by a team of over 400 reporters under the auspices of the Washington-based International Consortium of Investigative Journalists. The documents show that 2,212 of the 14,000 clients dealing with the Panamanian law firm came through Hong Kong. The second most numerous intermediaries — such as bankers, law firms, accountants and company incorporators wanting Mossack Fonseca’s services for 1,924 of their clients — came from Britain.

The Panama Papers play into the growing perception around the world that the top one per cent, who now own more than 50 per cent of global assets, live by different rules than the rest of humanity.

But in the 40 years of the company’s history covered by the leaked documents, Mossack Fonseca employees working in Hong Kong set up 37,675 offshore companies for clients.

Here’s how the system works. Mossack Fonseca offers legal counsel to those wishing to hide their money. The lawyers set up a numbered company in a tax haven such as the British Virgin Islands, the Bahamas, Seychelles or British Anguilla (small former British island colonies seem to excel in this trade).

That numbered company, and Mossack Fonseca’s lawyer-client confidentially, assure the wealthy of a double fence against exposure of their hidden assets to governments or anyone else. Assets in tax havens allow tax avoidance — acceptable, if not entirely moral — but also tax evasion, which is both reprehensible and illegal.

Another advantage of anonymous numbered companies is that they facilitate the avoidance of other taxes. For example, to sell an investment property in Vancouver or Toronto might only require the sale of the numbered company in the British Virgin Islands. So far as the Canadian authorities are concerned, there has been no visible sale — and therefore no transfer tax or capital gains tax gets claimed.

The lawyer-client relationship requires trust, of course. Until now, Mossack Fonseca has been able to convince even its most exacting clients — such as the relatives of Chinese President and Communist Party boss Xi Jinping and the not-to-be-crossed-lightly associates of Russian President Vladimir Putin — that their money and their reputations are safe with the Panama lawyers.

No more. This may turn out to be one of the most dramatic corporate flame-outs in history.

Already, Iceland’s Prime Minister Sigmundur David Gunnlaugsson has had to resign after the revelation that he and his wife have offshore holdings arranged through Mossack Fonseca. Other western leaders — such as Britain’s David Cameron, whose now-dead father had a Mossack Fonseca account — are clearly vulnerable. The papers identify 12 current or former heads of state and 61 people closely linked to current or former world leaders. Among them are eight current or former members of China’s seven-member Politburo Standing Committee, the top decision-making body.

Iceland’s Gunnlaugsson insists he did nothing wrong, and that he has always paid appropriate taxes in Iceland. That may well be true. Mossack Fonseca said in a statement that none of the services it provides is illegal and it keeps a rigorous eye open for such things as money laundering.

That is a valiant claim. Much, if not all, of the money being funnelled out of China — close to $1 trillion last year, according to a Bloomberg business news agency estimate — is moving in violation of the country’s currency laws and is illegal by definition.

This money flight is a dramatic vote of non-confidence in the longevity of the Communist Party regime — and Mossack Fonseca, like a Turkish trafficker, has been eager to assist the refugee wealth. The regulation-light city of Hong Kong, with a banking history going back to the days of the opium trade and an ability to move money quickly and quietly anywhere the client desires, is the hub of Mossack Fonseca’s China business. But the Hong Kong operation is fed by an extraordinary network of offices around the country.

The Panamanian law firm has outposts in the financial and manufacturing centres of Shanghai and Shenzen as well as the port cities of Dalian and Qingdao. Then there is Jinan, a centre for China’s coal industry, the industrial centre Hangzhou, and the major exporting city Ningbo. Risk-averse wealthy Chinese in these centres need only go down the road to secure their assets abroad.

The Panama Papers also play into the growing perception around the world that the top one per cent, who now own more than 50 per cent of global assets, live by different rules than the rest of humanity. Bernie Sanders’ campaign for the U.S. Democratic Party presidential nomination is built on the premise that modern capitalism is not working equitably. So, in a very different way, is that of Donald Trump on the Republican side.

The perception taking hold is that even though globalization of the economy and massive free trade agreements appear to benefit humanity at large, in truth they’re disproportionately beneficial to the already rich. Such agreements exacerbate the disparity between the rich and the rest, and stir social tensions in the process.

When the prime minister of a homogeneous and essentially equitable society like Iceland can be felled by the Mossack Foneseca files, it’s not outlandish to imagine that these papers could still have a revolutionary impact on politics and economics all over the world.

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